Commercial Awareness

Crisis revealing potential weaknesses of the Eurozone
By Gemma Mootoo Rajah

Given that Greece has been badly hit by the financial crisis, spreading doubts about the strength of the Eurozone is general and stressing the relatively stark economic disparities between its members, a pledge has been made by the EU to support Greece.

The pledge has been described as a mere 'political statement' to the extent that no detailed rescue package has been formulated. This indeed is due to the fact that Greece has not made a formal call for assistance. The leaders of the 27-nation bloc gave the assurance that they would ensure that a coordinated action would be implemented to guarantee the stability of the Eurozone should it be required. This statement comes at a time where the Eurozone has faced turmoil in the bond markets directly resulting from Greece's debt problems. It is feared that Greece's indebtedness could eventually become systemic and spread across the market.

Nonetheless, the fact that a precise bail-out plan was not articulated meant that investors in financial markets failed to regain confidence; in fact despite the small rise in global stocks and bonds markets, the euro fell 0.9% against the dollar. The agreement sets forth a set of guidelines that Greece will be expected to follow in the event that it would be granted financial support. Indeed, Greece would be expected to implement a sustained deficit reduction programme.

It is, however, recognized, that the German public (Germany having been traditionally recognised as the EU's paymaster) is likely to eschew the initiative for it would appear that German taxpayer's would be paying the high price of Greek's lax policies and general oversight. The present situation sheds light on the discrepancies between the EU states' economic condition and the varying domestic impact of the financial and economic crisis. Devising adequate policy measure is made even more difficult given a single currency and uniform monetary policy. The huge impediments associated with a standardised approach met by the existence of considerable gaps between member states are for sure giving EU policy makers a difficult time.

Source: Financial Times, dated 11 February 2010

Bank forecasts inflation rate above 3%
By Michelle Ng

The Bank of England's quarterly inflation reported that inflation is most likely to peak 3.5% this quarter before falling sharply and dipping below 1% in a year's time, if interest rates are kept constant and quantitative easing is not expanded. It also suggested that interest rates may remain lower for longer than expected.

Mervyn King said that the sharp inflation is due to the rise in petrol prices and the unexpected increase in VAT. He added that this is the 3rd inflationary occurrence, but assured the public that the predicted fall in inflation is reliable.

In unveiling the Bank's quarterly forecasts for inflation and growth, Mr King said that the path for growth differed little from his report in November, although recovery was likely to be weaker but the future risk to growth were smaller.

The forecast came after the Bank paused its £200bn programme of quantitative easing last week when evidence proved that the UK economy returned to growth in the final quarter of last year. This should not be taken as a total halt to the programme as, in the words of King, 'Éit is far too soon to conclude that no more purchases will be needed'.

The Bank expects inflation to be back at the 2% target in 2012. However, its prediction for 2013 shows a weak outlook for prices, with inflation falling below target.

As such, economists forecasts a prolonged period of low interest rates.

Source: ft.com